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Air Transport and Privatization

Privatization is an attractive option for governments that are in need of financing to modernize their facilities and equipment and looking for ways to improve the management efficiency of their air transport facilities. The World Bank Group has provided assistance in numerous privatization transactions. In addition, the IFC is financing the acquisition of new aircraft of private airlines in various client countries.

Air Carriers

Many developing countries have operated state-owned-carriers ("Flag Carriers"), which were born out of colonial independence. However, due to increased challenges on tariffs, the costly investments for safety and security, and the inefficiencies that state-run enterprises traditionally have, these air carriers are often inefficient and create large losses. Countries dominated by inefficient state-owned carriers not only prevent the development of a competitive air transport market (governments tend to protect their own airline by high entry barriers for new comers and restricted route allocations), but often create large budgetary losses supporting failing air carriers.

The WB has assisted many client countries in the restructuring and privatization of their national air carrier. The IFC can provide capital and funding for private operators in developing countries (draft TOR, privatization of Cape Verde).

Airports

Airport are complex infrastructure installations with many different types of services. The privatization effort usually involves examining not only one airport within a country, but investigating the entire system of airports. Usually, one or two highly viable and potentially self-sustaining facilities exist within a country, whereas the remaining airports, though highly necessary, depend on fiscal support from air transport system. The table below shows an often-used breakout between air-side and land-side type of different service components:

Aeronautical or Air Side ServicesNon-aeronautical or Land Side Services
OperationalHandlingCommercial
  1. Air Traffic Control
  2. Meteorological
  3. Telecommunications
  4. Police and security
  5. Fire, ambulance, and first aid services
  6. Maintenance
  7. Runway, apron, and taxiway maintenance
  1. Aircraft cleaning
  2. Provision for power and fuel
  3. Baggge and freight handling
  4. Processing of passengers, baggage, and freight
  5. Customs and immigration
  1. Duty-free shops
  2. Other retail
  3. Restaurant and bars
  4. Leisure services
  5. Hotel and accomodations
  6. Banks
  7. Car parking
  8. Car rental
  9. Other (news, banks, etc.)

Common airport revenue streams are shown below:
Airside RevenuesLandside Revenues
  • Aircraft landing fees
  • Passenger parking charges
  • Passenger fees
  • Aircraft traffic handling (ground and ramp)
  • Fuel and oil concessions
  • Duty-free shops
  • Catering and restaurants
  • Parking garages
  • Car rental facilities
  • Various concessions (news stands, shops, banks, etc.)
  • Airline terminal rentals
  • Utilities sales
  • Management consulting
  • Real estate
  • Investments
  • Other (hotels, travel services, etc.)

The degree of private sector participation (or the need of creating private sector participation) depends on variables differing on a case by case basis, as does the method of participation. The table below summarizes the various common approaches:

 

Complete
Government Control

 

 

Complete Private
Sector Control

Ownership

Government

Government

Government

Private Sector

Investment

Government

Government

Private Sector

Private Sector

Management
Operations

Government

Private Sector

Private Sector

Private Sector

 

PPI Options
commonly used

 

  • Service
    concessions
  • Contracting
    out
  • Management
    contracts
  • Multiple
    concessions
  • BOT scheme
  • LT leases
  • Master
    concession
  • Wraparound
    additions
  • BOO
  • Strategic
    buyout
  • Capital
    markets
Finally, when the choice to privatize has been made, the key components include a master plan based on airport planning expertise, a restructuring study separating out different airport services between different facilities and establishing what is to be privatized (including cross-subsidies that might be needed), an analysis of the regulatory framework, and the actual privatization transaction, as summarized in the table below:
Key ComponentsType of Expertise

Master Plan
A
nalysis of the national airport system:
(i) financial modeling,
(ii) traffic forecast, and
(iii) investment needs

Airport planning

Restructuring Study 
Among others: separation of air transport functions, packaging of airports to be privatized, cross-subsidy mechanism.
Sector strategic analysis and planning
Analysis of institutional and regulatory frameworkRegulatory and institutional economics
Design and implementation of transactionFinancial advisor, investment banking



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